Think twice before agreeing to punt an appeal where you and the other side are unpaid in relation to round one

Update, 19 March 2021: My Sydney colleague, Andrew Bailey, drew my attention to Longjing Pty Ltd v Perpetual Nominees Ltd [2017] NSWSC 1690 at [40]ff, which is to similar effect.

Original post: In Carter v Mehmet [2021] NSWCA 32, the Court granted the respondents’  security for costs application in part because the appellant’s solicitors had much to gain from the appeal’s success and had agreed to do it no win no fee, and so were creditors associated with the proceeding, but the appellant had not proven that the solicitors could not contribute funds in order to provide security.  Since it was not suggested that they could not provide funds to enable the appellant to give security in the order of scores of thousands of dollars (though there was evidence that they would not do so), it could not be said that the appeal would be stultified by virtue of the inability of the appellant and those who stood behind him to provide the security.

If you are a lawyer whose fees are unpaid from round one, consider very carefully whether you agree to do the appeal no win no fee, as opposed to entering into an orthodox retainer in the knowledge that payment may be difficult unless the appeal succeeds.  If you are an impecunious appellant in that situation, think even harder about accepting or proposing such a retainer, since — good as it sounds — it may effectively preclude you from pursuing the appeal.

The Court’s reasons were as follows:

’21 … there must also be considered in this context the position of the lawyers – whether their position is that of creditors or contingent creditors or otherwise – who stand to benefit from the successful prosecution of the appeal by the recovery of their unpaid costs and expenses from the hearing at first instance. Ordinarily the Court is not justified in declining to order security on the ground that it would stultify the relevant proceedings unless it is established that those who stand behind the litigation, and would benefit from it if successful, are also without means: see Bell Wholesale Co Ltd v Gates Export Corporation (1984) 2 FCR 1 at 4; Hession v Century 21 South Pacific Ltd (in liq) (1992) 28 NSWLR 120 at 123; and PS Chellaram & Co Ltd v China Ocean Shipping Co [1991] HCA 36; 65 ALJR 642 at 643 (McHugh J). Whilst the stated position of the lawyers is that they will not provide security, it is not established that they do not have the means to do so.

22. As Basten JA observed in Tyneside Property Management Pty Ltd v Hammersmith Management Pty Ltd [2014] NSWCA 417 at [51] in relation to an appeal, assuming that an order for security in any significant amount will stultify the proceeding, the interests to be weighed in the balance are the potential loss to the appellants of not being able to pursue their appeal on the one hand and the risk that the respondents will suffer unrecoverable financial loss for the costs of the appeal on the other. The process of weighing those interests necessarily directs attention to the merits of the appeal.

27. … For that reason, in weighing the respective interests of the parties for the purposes of this application, I proceed on the basis that the more likely outcome of the appeal is that it will fail.

28. I turn now to specific matters relied on by the parties. …

32. Fourthly, and most significantly, the respondents submit that the appellants’ lawyers are creditors or contingent creditors whose ability and willingness to provide security must be considered because they stand to benefit from the successful prosecution of the appeal beyond being paid their costs of the appeal incurred on a “no win-no fee” basis.

33. The present case does not concern a claim for personal injury. In such litigation the supply of legal services on a “no win-no fee” basis ensures access to justice for impecunious plaintiffs. For that reason, including in appeals in which the lawyers may stand to recover earlier unpaid fees as well as those incurred in the appeal, there is a general practice not to order security: see the observations of Handley JA in de Groot v Nominal Defendant [2004] NSWCA 88 at [29].

34. However that is not the present case. In Porter v Gordian Runoff Ltd [2004] NSWCA 69 at [41], whilst the amounts in issue were much higher than in this case, Hodgson JA considered a factor in favour of an order for security to be that the appellant’s legal advisors were owed substantial amounts of money giving them a “large stake” in the success of the appeal. The relevance of that factor, as his Honour’s reasons imply, is that lawyers with such an interest may reasonably be expected to provide some financial support for the prosecution of the appeal. The application to discharge that order on review was dismissed (Porter v Gordian Runoff Ltd [2004] NSWCA 171). In dismissing that application Bryson JA, with whom Sheller and Giles JJA agreed, likewise considered (at [32]) that the fact that the appellant’s lawyers stood to benefit if the appeal was successful supported the making of an order for security.

35. The lawyers in this case have made clear that they are not prepared to “lodge” funds by way of security for the costs of the appeal. In that respect their position is different from that of the lawyers in Tyneside where at the time of the application for security before Sackville AJA (see [75], [77]), there was no evidence that they were not prepared to advance funds by way of security. In the absence of such evidence his Honour was not satisfied that the appeal would be stultified, and made an order for security. However where there is a communicated unwillingness of a creditor or other third party to provide financial support, there remains a question whether it would nevertheless be reasonable that they do so if they wish to secure the continuation of the litigation. That being the correct approach was confirmed in Madgwick v Kelly (2013) 212 FCR 1; [2013] FCAFC 61 where Allsop CJ and Middleton J said (at [83]) that “unwillingness in itself is not determinative, and the question of the reasonableness of any unwillingness to contribute must be considered in determining what is fair in all the circumstances”.

36. When addressing that question in LRSM Enterprise v Zurich Australian Insurance Ltd [2014] NSWCA 88, Barrett JA (at [44]) drew a distinction between the position of what he described as mere “arms-length trade creditors” and those who have some more particular connection with the debtor company or the litigation, such as was the position concerning the solicitors in Tyneside “who were willing to continue acting in the litigation on the deferred payment basis”. In relation to the former, his Honour (at [43]) accepted that there was a question whether such trade creditors should be regarded as “standing behind” a moving party in the relevant sense.

37. However the lawyers in this case are not “mere” arms-length trade creditors. Their position is similar to that of the solicitors in Tyneside. They have resolved with Mr Carter that the appeal should proceed on a “speculative” basis. In the absence of that arrangement the appeal could not proceed. Their doing so makes it necessary for the respondents to incur costs which they will not recover (in the absence of any security) in the more likely event that the appeal fails. Addressing the question of fairness as between the appellants (and those “standing behind” them) and the respondents, it is reasonable that those lawyers provide some financial support to secure the continuation of the appeal. There is however a difficulty in determining the amount of that contribution in the absence of evidence as to the quantum of the unpaid fees and the particular arrangements between the lawyers and Mr Carter, all matters which from the appellants’ perspective could have been clarified.


39. Finally, the respondents rely on the fact that they seek security for costs in appeal proceedings where there has already been a determination adverse to the appellants (as to which see Mr D v Ms P at [38] citing Tran v The Commonwealth [2009] FCA 921 and Tait v Bindal People [2002] FCA 322) and significant legal costs have been incurred by both parties. They contend that the injustice in exposing them to incurring costs which will not be recoverable in the event that the appeal is unsuccessful is exacerbated in circumstances where their costs at first instance have not been paid, and are not likely to be paid.

40. Taking these matters into account, there are special circumstances which justify an order for the provision of security.

41. The appellants and their lawyers have resolved to pursue an appeal which is more likely to fail than not. Because of their impecuniosity, in the absence of any provision of security, the respondents face the reality of incurring substantial further legal costs with no realistic prospect of recovering them if the appeal is unsuccessful. Each party has already incurred substantial legal costs at first instance. In the case of the respondents the order that those costs be paid by the appellants has not been satisfied. In the less likely event that the appeal succeeds, in addition to obtaining judgment for an amount of about $500,000, the appellants stand to recover their costs incurred at first instance. The beneficiaries of their doing so are the lawyers and others whose fees at first instance remain unpaid. For that reason they have joined with the appellants in pursuing that outcome.

42. Whilst I am satisfied that an order for security should be made I am not satisfied that it should be made in the amount sought (being $80,000). Looking at the matter as between the appellants and those who stand behind them, and the respondents, and allowing that the lawyers’ unpaid fees are at least $70,000, it is reasonable to expect that they might contribute $40,000 towards the provision of security. Whilst security in that amount does not secure all of the respondents’ estimated party and party costs, it takes account of the impecuniosity of the appellants, their interests in prosecuting the appeal, and goes some way towards meeting the further cost consequences to the respondents in the event the appeal proceeds and is unsuccessful.

43 … I note, with significant concern, that the evidence reveals the respondents’ solicitor-client costs of this application to exceed $30,000. The security which I have ordered is not to be applied in satisfaction of those costs. Nor does the order I propose contemplate that those costs should be the subject of a separate application for security.’

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